코나그라 브랜즈(CAG) 2027 회계연도 1분기 실적 발표 콘퍼런스 콜: 인플레이션 및 2분기 전망

코나그라 브랜즈(CAG)는 1분기 실적 발표 이후 2027회계연도 계획 전제를 유지했으나, 운송비 상승, 신중한 가격 탄력성 가정, 브랜드 투자 확대를 강조했습니다. 경영진은 부채 감축 목표를 계속 추진하고 있으며, 포트폴리오 단순화에 따른 이익의 대부분은 2028회계연도에 나타날 것으로 예상하고 있습니다.

핵심 요약

• 경영진은 가격 탄력성과 추수감사절 관련 출하 및 소비 시점 차이를 반영해 2분기 자체 매출이 2% 감소할 것으로 예상합니다.
• 2027회계연도 인플레이션은 여전히 5%~6%로 전망되지만, 운송비 인플레이션이 당초 계획의 약 두 배 수준으로 진행됨에 따라 상단에 가까워질 것으로 보입니다.
• 2분기 영업이익률은 인플레이션 상승, 판매관리비 시점 차이, 광고 및 판촉비 지출 증가로 인해 1분기의 11.5% 대비 한 자릿수 후반대를 기록할 것으로 예상됩니다.
• 코나그라는 1분기 말 레버리지 비율 3.99배를 기록했으며, 약 2억 5,000만 달러의 부채를 상환하면서 2027회계연도를 약 4배 수준으로 마감할 것으로 예상하고 있습니다.
• 연간 매출총이익률은 전년과 거의 비슷한 수준을 유지할 것으로 예상되며, 가격 책정, 탄력성, 냉동식품 물량 감소는 이미 가이던스에 반영되어 있습니다.
• 코나그라는 400개 이상의 1인용 식사 품목(SKU) 검토를 포함해 SKU 단순화를 가속화하고 있습니다. 경영진은 재무적 이익의 대부분이 2028회계연도에 발생할 것으로 기대합니다.

주요 재무 데이터

사업 및 영업 성과

4분기 실적 발표 이후 도입된 가격 인상이 시장에 적용되고 있습니다. 경영진은 소매업체의 수용도가 계획 가정과 일치했다고 밝혔습니다. 코나그라는 경쟁업체가 가격 인상 조치를 따라 하지 않는다고 가정하고, 식료품 가격 탄력성을 약 2:1, 스낵류를 약 1:1로 모델링했습니다.

1분기 달콤한 디저트류는 견조한 성과를 보인 반면, 웰빙 스낵은 경영진의 기대에 미치지 못했습니다. 육포 스낵 및 씨앗류 제품은 유가 상승으로 방문객 수가 줄어든 편의점 노출도가 높습니다. 코나그라는 2분기부터 육포 스낵과 팝콘에 대한 마케팅 및 혁신을 강화할 계획입니다.

경영진은 원충(Cyclospora) 관련 수요로 냉동식품에서 일부 수혜를 입었으나, 영향은 미미했으며 포트폴리오의 다른 부분에서 일부 상쇄되었다고 밝혔습니다. 회사는 소비자 참여를 지속적으로 이끌어낼 요인으로 버즈아이(Birds Eye)의 브랜드 신뢰도, 편의성, 신뢰성을 강조했습니다.

코나그라는 또한 판촉 행사에 더욱 엄격한 투자수익률(ROI) 기준을 적용하고 있습니다. 경영진은 샌드위치 브라더스(Sandwich Bros.) 관련 특정 활동을 포함해 수익성을 저해하는 판촉을 반복하지 않을 것이라고 밝혔습니다. 이러한 가정은 2027회계연도 전망에 이미 반영되어 있습니다.

포트폴리오 단순화는 주요 영업 과제로 유지되고 있습니다. 코나그라는 셀레스테(Celeste) 피자 사업을 철수했는데, 이는 1분기 순매출에는 약간의 부정적인 영향을 미쳤으나 이익 증가에는 기여했습니다. 보다 광범위한 이 이니셔티브는 낮은 생산성의 SKU, 규격 및 처방을 줄이는 동시에 조달 규모, 제조 효율성 및 매대 회전율을 개선하는 데 중점을 두고 있습니다.

1인용 식사는 주요 중점 분야로, 현재 포트폴리오에 400개 이상의 SKU가 포함되어 있습니다. 경영진은 단순화가 해당 카테고리에 대한 주력 의지 축소를 의미하는 것이 아니라 파급력이 큰 제품에 투자와 유통을 집중하기 위한 것이라고 설명했습니다.

경영진 가이던스

경영진은 2분기 자체 매출이 2% 감소할 것이라는 전망을 유지했습니다. 이 전망에는 신중한 탄력성 가정과 추수감사절 전후의 계절적 시점이 반영되어 있으며, 이로 인해 출하량이 소비량을 밑돌 수 있습니다.

2분기와 3분기의 인플레이션은 1분기보다 높을 것으로 예상되며, 2분기와 3분기는 비슷한 수준일 것으로 보입니다. 경영진은 코나그라가 상승했던 운송비, 식용유, 골판지 포장재 및 알루미늄 비용의 기저 효과를 받기 시작함에 따라 4분기 인플레이션이 3분기 대비 완화될 것으로 예상합니다. 더 넓은 범위의 비용 비교는 2028회계연도에 더 유리해질 수 있습니다.

1분기 영업이익률 11.5%에서 2분기 한 자릿수 후반대로의 예상 하락에는 인플레이션 상승, 판매관리비 시점 차이 수혜의 소멸, 광고판촉비 지출 증가라는 세 가지 주요 원인이 있습니다. 1분기 판매관리비 수혜의 약 절반은 일회성이었고 나머지 절반은 2분기로 이월될 것으로 예상됩니다. 1분기 총 판매관리비 수혜는 주당 약 0.03달러 수준이었습니다.

코나그라는 연간 매출총이익률이 전년과 비슷한 수준을 유지할 것으로 계속 예상하고 있습니다. 가이던스에는 예상 가격 탄력성, 냉동식품 물량 감소 및 관련 고정비 제조 흡수 효과가 이미 반영되어 있습니다.

경영진은 3배라는 장기 레버리지 목표를 재확인했습니다. 2027회계연도 말 레버리지 비율은 약 4배 수준을 유지한 후, 수익성 개선과 배당금 조정을 통해 2028회계연도에 진전을 이룰 것으로 예상합니다.

리스크 및 주시 항목

• 운전 기사 부족과 유가 상승으로 운송비 인플레이션이 가속화되었으며, 코나그라의 당초 계획보다 약 두 배 빠른 속도로 진행되고 있습니다.
• 냉동식품 가격 인상이 여전히 시장에 적용 중이어서 실제 소비자 탄력성에 대한 불확실성이 남아 있습니다.
• 냉동 및 냉장 제품의 물량 감소가 고정비 제조 흡수율을 압박할 수 있으나, 경영진은 이 효과가 가이던스에 포함되어 있다고 밝혔습니다.
• 편의점 수요는 유가 상승으로 인한 압박을 받으며 육포 스낵과 씨앗류에 영향을 미치고 있습니다.
• 밀 가격 변동성으로 인해 아던트 밀스(Ardent Mills)의 원자재 거래 기여도를 정확히 예측하기 어렵습니다.
• SKU 축소는 소매업체의 진열 재조정 일정 및 재고 관리와 조율되어야 하므로 대부분의 예상 이익은 2028회계연도까지 지연됩니다.

애널리스트 Q&A 하이라이트

비교적 안정적인 소비 추세에도 불구하고 코나그라가 2분기 자체 매출 2% 감소를 예상하는 이유는 무엇입니까? 경영진은 가격 인상 적용, 신중한 탄력성 가정, 추수감사절 시점 차이를 원인으로 꼽았습니다. 해당 분기 동안 계절적 소비가 출하량을 상회할 수 있습니다.

인플레이션 전망이 높아진 원인은 무엇입니까? 단백질 원가는 계획보다 우호적이었으나, 운송비 인플레이션이 이를 상쇄하고도 남았습니다. 경영진은 2분기와 3분기 인플레이션이 1분기 수준을 웃돌다가 4분기에 완화될 것으로 예상합니다.

2분기 영업이익률이 감소할 것으로 예상되는 이유는 무엇입니까? 주요 요인은 인플레이션 상승, 1분기에서 2분기로의 판매관리비 이월, 광고판촉비 지출 증가입니다. 투자는 1인용 식사, 육포 스낵, 팝콘에 집중될 것입니다.

레버리지 비율을 3배 수준까지 얼마나 빨리 낮출 수 있습니까? 코나그라는 2027회계연도에 약 2억 5,000만 달러의 부채를 상환하고 연말 레버리지 비율을 4배 수준으로 예상하고 있습니다. 경영진은 2028회계연도에 더 큰 진전이 있을 것으로 기대하지만, 해당 연도의 구체적인 레버리지 전망은 제시하지 않았습니다.

코나그라는 차환(리파이낸싱) 리스크를 어떻게 관리하고 있습니까? 회사는 운전자본용 기업어음(CP)을 제외하면 부채가 거의 전액 고정금리라고 밝혔습니다. 회사는 5억 달러 채권과 2억 6,000만 달러 채권의 만기를 앞두고 지난 7월 5.4% 금리로 5억 달러 규모의 채권을 발행했습니다.

밀 가격 변동성이 아던트 밀스에 어떤 영향을 미칩니까? 핵심 제분 사업은 비교적 안정적인 반면, 밀 가격 변동성은 원자재 거래 기회를 창출할 수 있습니다. 아던트 밀스는 1분기 코나그라 내부 예상보다 주당 약 0.03달러 우호적인 실적을 냈으나, 경영진은 이 기여도를 정확히 예측하기 어렵다고 밝혔습니다.

실적 발표 스크립트 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

Good morning, and welcome to the Conagra Brands Q1 Fiscal Year '27 Earnings Q&A Conference Call. [Operator Instructions] Please also note, today's event is being recorded.

At this time, I'd like to turn the floor over to Matt Neisius, Head of Investor Relations. Please go ahead.

Matthew Neisius

Good morning, everyone, and thank you for joining us. Once again, I'm joined this morning by John Brase, our CEO; and Dave Marberger, our CFO. We may be making some forward-looking statements and discussing non-GAAP financial measures during this Q&A session. Please see our earnings release, prepared remarks, presentation materials and filings with the SEC in the Investor Relations section of our website for descriptions of our risk factors, GAAP to non-GAAP reconciliations and information on our comparability items.

I'll now ask the operator to introduce the first question.

Operator

[Operator Instructions] Our first question today comes from Andrew Lazar from Barclays.

질의응답

Andrew Lazar

Maybe I want to start out -- can I pointing to organic sales in fiscal 2Q to decline 2%, a bit heavier than current consensus. It looks like quarter-to-date, maybe scanner looks to be running maybe closer to flattish. So, I guess, I'm just curious if anything has changed in your 2Q top line outlook and whether it's elasticity or something else that might cause a sequential deceleration or perhaps it's just more prudent planning?

John Brase

Andrew, let me start and turn it over to Dave. But I think in general, the pricing we discussed in the Q4 earnings call is really just hitting the market kind of as we speak. And so I would say in terms of our pricing assumptions, at this point, results are in line with how we planned the year. And I like the word you use, Andrew.

I think we've taken a very prudent approach to our elasticity assumptions and these assumptions remain unchanged, which is really frozen at more of a 2:1 elasticity that we've modeled for the year in grocery and snacks at more of a 1:1 elasticity. Now in terms of competitors and followership, I would say we have not assumed any followership our pricing moves. Obviously, if that happened, there could be some upside to those elasticity assumptions, but we have not modeled that in.

David Marberger

Just one additional piece of color. So we guided to 2%, down 2% organic for Q2. This contemplates Thanksgiving timing because you have the second quarter of this year versus third quarter. So we may ship a bit below consumption in the second quarter because of the seasonal items may have some more consumption versus shipments. So the 2% is consistent, like John said, with our original planning posture.

Operator

Our next question comes from Peter Galbo from Bank of America.

Unknown Analyst

Just wanted to touch on the updated inflation guidance for the year, having moved kind of at the higher end of the $5 to $6 million I know you had kind of Q1 inflation in the 5-ish percent range, more towards the low end. But just kind of how you see it pacing over the balance of the year? And maybe just help us think about exit rate. Are we above that 5% to 6% as we get and kind of how we might think about it again from a phasing perspective.

David Marberger

Yes, Peter, thanks for the question. Let me try to give you a little bit of color here. So as we talked about for Q1, we did have some favorability in proteins relative to our planning -- so we were a bit favorable, which drove some of the favorability we saw in Q1. But as we went through Q1, obviously, we've seen an acceleration in inflation around logistics or transportation cost, really driven by the driver shortage and oil prices as well. So as we forecast inflation, we're still in that 5% to 6% range for the year, we said towards the higher end of the range.

And really, what's happening is the favorability that we've seen in proteins, which we would continue to see is a little bit more than offset by the -- basically the doubling of inflation in transportation versus where we planned it for the year. So it's kind of a trade-off there. In terms of the flow of the year, we would expect -- and we usually don't give this much detail, but I think it's important because I think there's some confusion on this inflation. We would expect our inflation rate in Q2 and Q3 to be higher than Q1 and and that to be about the same.

And then we expect our Q4 inflation rate to actually be lower than Q3. So that's kind of the flow. And as we sit here today, we have no reason to believe that we wouldn't be wrapping on not just the transportation costs that we're seeing but things like edible oils and kind of our corrugated aluminum, we have a lot of areas where we're still seeing high inflation which we will have all during fiscal '27. I don't see a reason why we couldn't expect that we would wrap on that. So obviously, we'll have to get closer for that. But I feel like Q4 will be lower than Q3, and we should be wrapping on a lot of these higher inflation categories in our materials when we get into fiscal '28.

Operator

Our next question comes from David Palmer from Evercore.

David Palmer

I wanted to ask you about the pricing, the acceptance at retail, how much is that factor into what you're thinking there? Or your price elasticity modeling just basically a price impact to the consumer in a vacuum of competitors, not also pricing? And I have a quick follow-up.

John Brase

Yes. Thanks for the question. I think in terms of pricing, I kind of go back to my opening comments, I'd really say really in line with our expectations. And so we're really past kind of the customer acceptance of that now pricing is effective in market. And I would tell you that customer acceptance there was no surprises versus our planning posture. And so that's how I think about pricing as we move forward.

David Palmer

And then I noticed you had some comments about not not repeating a promotion from last year on the Sandwich Bros brand. Is that the kind of thing that you will be seeing throughout the year that there'll be promotions that you see that you already see that were not effective from a profitability standpoint? And is that baked into your guidance? And I'll pass it on.

John Brase

Yes, great question. And again, I think we continue to look at our promotional dollars through a real ROI mindset. And I think we've been really prudent of saying, hey, we're not going to repeat promos that have been dilutive to the company. And I think that's what you're seeing in some of this simplification, really focusing on those high leverage elements that can bring value to not only the consumer but also to the shareholders. And so we're going to continue to make that a part of how we operate. But I would tell you, again, everything -- all those assumptions have been embedded into the fiscal year forecast.

Operator

Our next question comes from Tom Palmer from JPMorgan.

Thomas Palmer

I wanted to maybe just clarify on your second quarter expectations. You've got this high single-digit operating margin outlook incremental pricing is flowing through. There was the SG&A call out. I just want to make sure I kind of have my arms around the gross margin cadence here. Like is there a step down expected in gross margin as we move into 2Q? Or is this really about the timing of SG&A that swings the margin lower?

David Marberger

Yes, Tom, let me take that. There's really 3 drivers. If you would look at where we landed on operating margin, let me just kind of go there at 11.5% for Q1. We said higher single digits for Q2. There's really 3 drivers. One, as I just mentioned, we expect higher inflation in Q2 versus Q1. The second piece is the SG&A favorability that we had in Q1. It was roughly $0.03 of our EPS beat.

Half of that was a onetime benefit. Half of it was timing where it didn't hit in Q1. It's going to hit in Q2. And then the third piece is accelerating our investment in A&P. So we expect to increase A&P as a percentage of net sales to versus 2.3% as it was in Q1. So they're really the 3 drivers. So you will see a little bit of a on gross margin from the higher inflation versus Q1.

Operator

Our next question comes from Alexia Howard from Bernstein.

Alexia Howard

Great. Could I ask about the leverage. So, you've talked about the 3x being the long-term target. And I think it increased a little bit this quarter. I think you're saying that you'll still probably be at 4x by the end of the year or you said through fiscal '27 it will remain at this 4x. So how quickly do you expect to start on that deleveraging trajectory? And how quickly do you expect to achieve that goal?

David Marberger

Yes. Alexia, if you start with this year, yes, we -- we guided to expecting to finish the year approximately 4x on our leverage. We finished Q1 at 3.99x, that's actually favorable to where we thought. Usually, what will happen in Q1 and Q2 as our leverage will click up because we're very seasonal with our inventory, right, with our seasonal businesses and things like our tomato operations, we built all the inventory in Q1 and Q2. So obviously, we use cash in the first half and then we have cash inflow in the second half. So that's very normal.

So we're still on track with the approximately 4 times that -- we don't get specific with this, but it's implied. We do expect to pay down debt in the year for the full year. Approximately $250 million of debt pay down is what we would expect for this year. Our target is 3x. We are maniacally focused on getting there as soon as possible.

As we get into fiscal '28, John talked about it, we're focused on improving margins and profitability of this business. So with improved profitability and the dividend adjustment that we made, we feel like we're going to be able to make great progress in fiscal '28 on getting that leverage down. We're not going to give you that number today, but we want to get to 3x as soon as possible.

Operator

Our next question comes from Chris Crey from Wells Fargo Securities.

Christopher Carey

This is Chris Carey. I wanted to ask about the -- next portfolio. Can you just give us a sense of maybe where you are on some of the interventions to improve performance. You talked about, I think, popcorn, Blim Jim, yes, what are the expectations more from a volume standpoint as you look forward and perhaps lap some of the elasticities over the medium term?

And then just maybe not a location, but just curious whether you're seeing or you thought you saw any benefit in your frozen business from Cyclosp-related demand and if that's a factor in how you're viewing the next few quarters in frozen.

John Brase

Great. I'll take both of those. As you think about snacking, let's start with the positives. Really, our Sweet Treats portfolio continues to perform really, really well and had a very strong quarter Q1, and that's really behind both StackPac and Swiss must continue to really be performing very well in the market. I think permissible snacking, as you said, is really where we're not where we want to be there. And I think a couple of points of drivers there. The first is, obviously, we're very overdeveloped in our meat snacks and our seeds business in the convenience channel, which has been really challenged lately with the higher gas prices.

But I think aside that, there's work to do from my standpoint in terms of from an execution and a channel lens, we need to do a better job of participating where the growth is really coming from, specifically in the meat snacks category. As you take a step back and you think about meat snacks and popcorn and seeds, these are fantastic categories, and we are the market leader. And so it's our responsibility to kind of drive these categories forward.

And so I think what you're going to see, and you're already seeing as we go into Q2, a significant step-up in our brand building and marketing specifically pinpointed at meat snacks and popcorn specifically there, but then also innovation, a major step-up in innovation. We think those are the -- those are the 2 critical levers that kind of get us back to a growth trajectory in those important businesses.

On Cyclospora, just a quick one there. We did see some benefit, but I would tell you, nothing material as we think about Q1 and we also actually saw some offsets from Plecospora as you think about like our Wish-Bone salad dressing as an example. So again, nothing material there. But I think more than the onetime benefit, I think what's really important is this is a reflection of consumers coming to a brand they know and trust with Birds Eye, and we did a great job of delivering for them. And so I think as you think about that brand, we've got such an opportunity to drive better -- more trial and more engaged with consumers. We deliver great taste great convenience and honestly, reliability that they're looking for in their vegetables. So we think a great opportunity to continue to drive.

Operator

Our next question comes from Max Gumport from BNP.

Max Andrew Gumport

Question, just coming back to the 1Q and your reaffirmed outlook for the year. Obviously, it was a sizable EPS to be versus consensus, and I think first year expectations too. They get some help from inflation. There were some SG&A timing benefit as well and your inflation outlook for the remainder of the year has picked up. But I'm curious to what degree the firmed outlook maybe has embedded additional conservatism in that, especially with regard to mills as well given the weak price volatility.

David Marberger

Yes, Max. Let me take that. Starting with Q1, you kind of hit it. We had a beat to our expectations really driven by, I think, 4 things: our SG&A which was the timing and then the 1 time we had the Ardent Mills benefit. We had the inflation lower than our internal forecast. And then we did get a bit of benefit on the tariff refund that we got in the quarter, which was close to us then.

When you look for the full year, SG&A, we talked about it, the onetime, the onetime and then you have the timing and -- but that's pretty much on track. The big -- the big impact is the acceleration of transport and inflation. It's double the rate that -- and we had assumed inflation for transportation at double the rate. The good news is that we have some other areas in materials where we're favorable to that. So there's a lot of puts and takes there.

The other dynamic is we're just starting with our frozen pricing. And so we really need to see how this plays out. We've been very clear on how we've modeled elasticities there could be a scenario where maybe that winds up being conservative, maybe not. So we just need to see how that plays out. And then Ardent Mills, we were favorable about $0.03 in the quarter to our expectations for Ardent Mills. Wheat prices have been extremely volatile, right?

If you just kind of look from May to now, they're up significantly, but they've been up and down. And so that creates trading opportunities for the ethos the Ardent business. And so the thing with that is it's a little bit more difficult to forecast that with Precision for the full year. So we thought it was prudent to hold the year, it's 1 quarter, and then we'll update at the half and if things continue as they do in Q1, then maybe we have some upside there, but we want to wait a little longer to see.

Operator

Our next question comes from Robert Moskow from TD Cowen.

Robert Moskow

I don't know if I saw kind of a firm guide on gross margin for the year, 3 months ago, I think the guide was kind of flattish. But now you have the higher cost and the other element that I wanted to ask about, Dave, is in the frozen and refrigerated division, the volumes are going to be down like 10%. And at the same time, you were also increasing capacity, particularly in frozen chicken. So I'm just wondering if there's -- how are you managing through the leverage consequences of that. Is that a drag -- have you already put into your numbers a drag from that dynamic?

David Marberger

Yes, Rob, good questions. The first one, we've held our guidance for operating margin for the year. So obviously, gross margin is a big part of that. We've had puts and takes in the cost. And so we're still where we were before, which is relatively flat to the prior year in terms of gross margin. To your second question, yes, obviously, we have modeled the pricing and the elasticity impacts and there's volume impacts where we have decreases in volume in our frozen business. We've modeled that. We've taken into account the absorption impact. So all of that is included in guidance that we provided, and we'll just see how that plays out.

Operator

Our next one comes from Rob Dickerson from U.S. Bancorp.

Robert Dickerson

John, I just want to ask you about the simplification process, kind of how you're thinking about SKU rationalization and then maybe even brand rationalization, right? I realize you said last quarter prepared remarks this quarter again, kind of looking at everything, but there was -- it was noted in those prepared remarks that, I guess you exited Pizza -- and I'm just curious, I mean, clearly, when you exit that, that rationalize SKUs. So like are there parts of the portfolio such that you could simplify by just kind of stepping away from certain brands that are online that you have? And then I guess, secondly, just kind of broadly, like how are you thinking at this point about the manufacturing footprint.

David Palmer

Rob, thanks for the question. And if you guys will indulge me, I'm going to go a little bit long on this 1 because I think it really is important for you to kind of understand how we're thinking about this. I am incredibly excited about the opportunity we have to really reduce complexity across the enterprise. And I will tell you, SKU optimization is definitely one of those areas. As we've discussed before, we have an extremely long tail of SKUs that we are getting after. Right now, we did -- we stood up an internal work stream that's really looking to significantly reduce SKU count.

And I put this work into 2 buckets. There was smaller bucket, which you just alluded to, is there are certain brands and categories where we simply just don't see a future. And it just makes sense to exit those, those small really unprofitable brands or low-profit brands as soon as possible. And so we made the decision, as you saw with Celeste pizza, which had a minor impact on net sales for Q1, about impact, but it was actually profit accretive to the enterprise. And I think we'll continue to look for more of those small opportunities that we do see in front of us.

I think the larger opportunity though is what I'm really calling the simplification of our core platforms. And I want to use an example here that I think will bring this to life, single-serve meals. We've got over 400 single-serve meal SKUs and I believe there's a future where we can have a much simpler, more productive assortment. That doesn't mean for a second that we don't believe in the category that we have any plans to see distribution we're going to stop innovating. I would say just the opposite. We want to double down in this business.

And we think an optimized assortment can help drive velocity on our most impactful SKUs. So that -- in terms of SKU complexity, that's one component. But I would also tell you, we're looking to optimize our formats and formulations. We just have to do a better job of eliminating nonvalue-added complexity that the consumer quite frankly, isn't willing to pay for. So as looking at this, we're not just looking to do we're looking at formats and formulations as well. And I think as you fast forward, this is going to do several things for us.

It's going to drive stronger operational efficiency. It's going to drive procurement savings as we're procuring fewer items, but with greater scale. It's going to help us drive improved focus, which I think is so important. When we get focused on something, we execute with excellence. We need to focus our organization a bit more, and this will do that. And then and finally, improved velocity on shelf, which is good for us, good for our customers.

And so the last thing I'd say here is we're going to take a real measured approach in how we roll out the SKU simplification. We really need to coordinate this with our customer reset timing and look at inventory impacts. So I would see the majority of this benefit from this work to happen more in fiscal '28, but the decisions are happening right now.

Operator

All right. Our next question comes from Scott Marks from Jefferies.

Scott Marks

Wanted to just ask a little bit about the consumer. You made some comments in the prepared remarks talking about the consumer just being thoughtful about where they're spending their dollars, obviously, manage them through a volatile environment. Any updates you can share with us in terms of what you're seeing? Have things improved, gotten worse? Just any changes that you've seen recently?

David Palmer

Yes. Thanks for the question. And I think I would describe the macro environment is dynamic. That's probably an understatement. But in terms of the consumer, I would kind of say the word -- I would use is muted and continues to be kind of bifurcated by income, no doubt about it. But having said that, we really haven't seen any material step change in consumer behavior. There's pockets. C-store as an example, that's been a bit more pressured in recent months because of the gas prices, but overall, I would say the consumer has been relatively stable and resilient.

And our job is to continue to stay incredibly close to the consumer. And we've got to evolve alongside how they're evolving and delivering the food they want, where they want it, but also importantly, at the right value. And this is what I love about our portfolio we've got brands that compete all across the value spectrum, value brands like Banquet all the way up to more premium offerings like Healthy Choice. And so we've got a portfolio that can meet this dynamic consumer wherever they are.

Operator

Our next question comes from Lee Jordan from Goldman Sachs.

Leah Jordan

Just if you could provide more detail on the changes in your approach for the step-up in the A&P spend. It sounds like you've had some early traction. Just curious what's been working, how are you measuring that return? And where you allocating the step-up in spend you're planning to do in 2Q?

John Brase

Yes. As you think about A&P, this is a big one for me. We have so many great brands. But if I'm being truthful, we haven't consistently invested behind them. at the levels that are required to drive that brand affinity and awareness. And so we have a tremendous opportunity communicate more with consumers to ensure they understand we've got great value propositions out there. And our job is to make sure they fully understand it. And so as you think about the investments, I'm really pleased in 2 fronts. One, we're investing more; and two, we're getting that money to work a lot harder for us.

And this is kind of this new modern marketing machine that we're building internally that I think can become a real competitive advantage. And so as you think about where we're focusing these investments, it's really in 3 places: single-serve meals, meat snacks and popcorn. We're going to be very, very targeted in those important growth ambitions.

And your last point is a good one, too. We're already seeing some really positive results in terms of improved reach and engagement from some of the changes that we're doing. We've gotten a lot more targeted in who we're going after, how we're going after them and our messaging is just sharper and more compelling. And so I think this is a tremendous opportunity to use this increased focus on brand building to help kind of return us to growth and then drive brand relevance.

Leah Jordan

That's very helpful. And then my follow-up was just on interest expense. I thought it was reiterated for the year. We've had to move higher in rates here recently. I think you're mostly fixed exposure, but I did think you had a little bit of floating. So just kind of catch up, remind us where your exposure is there. And then I also thought you may have some refinancing needs in the relative near term. So just how are you thinking about that in this interest rate environment as well?

David Marberger

Yes, let me take that. The first one, we're pretty much 100% fixed right now. The only variable debt that we have is our commercial paper and so we use that as sort of our working capital needs. So we're very high percentage fixed that we're really not exposed to the interest rate environment. Now yes, we do have 2 bonds coming due this month.

We have a $500 million note and a $260 million note. We actually went into the market in July and financed ahead. And so we issued a $500 million note, the rate came in at 5.4%. The timing was actually pretty good there, given what rates have done since then. So between the -- from the proceeds of that and just our normal kind of borrowing capacity, we're very comfortable refinancing these notes this month.

Operator

And our next question comes from Carlo Casella from JPMorgan.

Carla Casella

One on that last question as well as Lexia's earlier question on leverage. Have you had your conversations with the agencies because we've seen, in some cases, other peers that have cut their dividend and focused on deleveraging, but still gotten downgraded. Do you think they're kind of changing their view at all on your business?

David Marberger

Yes, Carla, we talk to the agencies all the time. And so they're very clear on our financial policy our priority of using our discretionary cash flow to pay down our debt as quickly as possible. So we're always working and talking to the agencies. They obviously looked at our cut of the dividend as a positive in terms of our credit rating and our position. So they know where we're going. They know what our priorities are. So now it's a matter of just continuing to get that leverage down.

We know the markers for levels where if you -- leverage exceed certain levels, you may be putting investment grade at risk. We're not near those levels. And we're moving in the right direction, which is down with our leverage and they know that. So that's our strategy. That's our focus, and they're very aligned with that.

Carla Casella

Okay. That's great. And then just one follow-up on Ardent Mills. How do we think about the volatility in wheat and how that flows through the numbers? I know it was a benefit for this quarter. But how should we think about that going forward?

David Marberger

Yes. So think of Ardent Mills as really two different businesses. They have a business where they mill flower and they sell flower at a margin and they're selling flower to the Domino's pizzas of the world and everything. So they're dealing with the same volume dynamics that the entire food industry is, but they do an amazing job of providing great customer service, that's a competitive advantage for them. But that business is more stable and more flattish. If you look at the other part of their business, it's what we call commodity revenue, and that's the trading opportunities they create when you have volatility in the wheat markets.

And so that's what we saw in Q1 and the hard part there is when that comes, it's a little bit difficult to forecast with precision. But generally, with more volatility Ardent Mills will benefit from that volatility with their commodity trading business. And so -- and the good news for us is we're very aligned from a capital allocation perspective. So in terms of profit, we have a minimum of 80% cash flow conversion on that profit, and we're very aligned with Ardent and our partners on that philosophy.

Operator

And ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Matthew Neisus for closing remarks.

Matthew Neisius

Thank you, Jamie, and thank you all for joining us today. Feel free to reach out to Investor Relations with any additional questions. Have a good day.

Operator

And with that, we'll conclude today's Q&A session and conference call. We do thank you for joining. You may now disconnect your lines.